As 2012 begins, the economic crisis of the last four years shows no sign of subsiding. The present world upheaval is now considered comparable to the Great Depression. The US and Europe are so paralyzed by debt that significant recovery looks remote. Plans for social service cuts and hefty tax hikes are provoking social and political unrest. Millions of people in the wealthier countries are suffering serious hardships with the worst damage likely still to come – meanwhile, well over a billion people in the developing countries are forced to get by on little more than US$1 per day.
Recently religious leaders have spoken out about how to reform the world economy to promote a more humane and ethical system. The most perceptive and comprehensive example was published last October by the Vatican’s Council on Peace and Social Justice (PCPJ) called “Reforming the International Financial and Monetary Systems in the Context of Global Public Authority.”
The authors, a team of Vatican scholars led by Cardinal Peter K.A. Turkson of Ghana, attribute many of our current ills to the doctrine of “economic liberalism”, which they say is based on “utilitarianism and materialism.” It is a highly readable analysis with a vision for a more integrated and stable financial and monetary system, which the authors believe would usher in an era of sustained and more widespread economic development.
The document was issued to coincide with a crucial meeting of the Group of 20 – the leaders of the world’s largest economies – who stated in 2009 that “the economic crisis demonstrates the importance of ushering in a new era of sustainable global economic activity grounded in responsibility.” The document identifies the devastating role of “financial speculation” and “unlimited credit” which wrecked havoc on the “productive” economy. At present, say the authors, the world economy is so dominated by avarice and corruption that one can speak of an “ethical breakdown”.
Many of the insights into the root causes of the crisis presented by the Catholic Council have been glossed over by most leading economists and financial experts. The critique is very similar to remarks made by Pope John Paul II. In 1991 he warned of an “idolatry of the market, an idolatry which ignores the existence of goods which by their nature are not and cannot be mere commodities.” He continued that we “ought to have a keen sense of belonging to the human family, which means sharing in the common dignity of all human beings.”
The proposal was received by the world financial media with a mixture of indifference and hostility. But, curiously, the bulk of unfavorable comments came from Catholic writers in conservative American magazines and think tanks. They were particularly upset at the criticisms of free trade doctrine, international markets, and also by the statement’s bold recommendation for creating a world financial authority to coordinate and regulate world economic transactions.
Overall, there are ample reasons to applaud the significant achievements of globalization. From 1980 to 2010, global trade grew fourfold. As national income rose, countless millions were lifted from poverty; new middle classes arose in Asia and Latin America. Nevertheless, inequalities within and between countries say the authors, have also multiplied, making far too many families poorer and more vulnerable.
One crucial factor in the crisis is the role played by monetary and financial markets which are increasingly divorced from the production of actual goods and services. “The speculative bubble in the real estate and the recent financial crisis,” say the authors, “has the very same origin in the excessive amount of money and the plethora of financial instruments globally.”
Speculative markets have grown exponentially: “In recent decades banks extended credit which generated money, which in turn sought further expansion of credit.” The instability triggered a series of crises that lead eventually to the US housing collapse. “In material goods markets,” the Pontifical Council stated, “natural factors and productive capacity as well as labor in all its any forms set quantitative limits” which permit an efficient allocation of resources.
However, monetary and financial markets are an exception and without proper regulation can spiral out of control. To cite one example, the former Prime Minister of the UK, Gordon Brown, estimated that the total value of world derivatives (mostly speculative wagers) had grown to an unfathomable figure of over $500 trillion by 2008. That sum is 12 times the entire world’s yearly economic output!
A “liberalist” approach,” which rejects prudent public intervention in the market, says the PCPJ, has had devastating effects on the real economy, employment, production and international trade. Economic liberalism, say the authors, “Is a theoretical system of thought, a form of ‘economic apriorism.’ It purports to derive the laws for how markets function from theory, these being laws of capitalistic development, but it exaggerates certain aspects of markets and downplays or ignores others.”
The Council says such an “a priori” belief in laws, “without measuring them against reality, risks becoming a tool subordinated to the interests of the countries that effectively enjoy a position of economic and financial advantage.”
Exactly three years ago, one of the most lauded free market experts who served for 18 years as US Federal Reserve Chairman made a stunning declaration. Alan Greenspan told a Congressional committee that he had found “a fundamental flaw in the edifice of market economics. Greenspan was candid in confessing that much of what he had always believed was altogether erroneous.
In his recent book Beyond the Crash: Overcoming the First Crisis of Globalisation, Gordon Brown admits that the leading authorities “had not fully appreciated that moral norms were not constraining the behavior of those competing across complex and interlocked global entities.”
According to economist Robert J. Samuelson, “the 2007-09 financial crisis, having started in the US discredited American ideas and competence… A world of increasing interconnected economies requires greater cooperation – but everywhere there is a fragmentation of power and purpose.”
Along these lines, the PCJP offered its proposal to establish a world financial authority to permit better coordination of the process of globalization, and to work toward a more just, and sustainable path for world economic development. Such a coordinating body would be “the outcome of a free and shared agreement”, designed to incorporate the interests of billions of people around the world, “including nations and cultures that have little influence.” It would be set up gradually within a suitable legal framework. It would support free and stable markets including a “well functioning (legal framework) in support of sustainable development and social progress of all, and inspired by the values of charity and truth.”
Beginning with the Rerum Novarum (On Capital and Labor) in 1893, the Catholic Church has published a series of insightful and influential social encyclicals which apply the moral outlook of Church teachings to contemporary ethical issues and social ills. According to veteran Catholic reporter Paul Likoudis, every theme in the October statement is entirely consistent with “a long line of Vatican appeals.”
Even the Anglican Archbishop of Canterbury, Rowan Williams, remarked, “There is help to be had from…. a bold statement on our financial situation.” He endorsed its sound suggestions “to minimize the damage of certain current practices and assumptions in the immediate future.”
Only days after its release a number of well known Catholic publications and free market advocates immediately raised a series of red flags. Writing in the Wall Street Journal, Father Robert Sirico, president of the Acton Institute, commented, “This is a sophisticated economic analysis… but discerning the disease and finding the cure are very different undertakings.”
He strongly disagreed that there is a need for such a “global financial authority.” Similarly, Phillip Lawler praised the analysis for affirming that “utilitarian standards are inadequate to define the common good” and says “there are many lessons that financiers could learn from Church teaching.” But he derided the statement as riddled with “flakey leftist theory” and advised authors, “leave economic analysis to the economists.”
The most peculiar retort came from Mark Brumley of Catholic World Report who joked that, “the Pontifical Council for Justice and Peace might just as well call for the establishment of Star Trek’s United Federation of Planets. It would have just as much likelihood of providing solutions to our problems.”
Despite the controversy over economics, there are many reasons to welcome the appeal of this insightful document. We need a spirit of confidence to overcome the spread of confusion and despair.
It also furthers the important debate about the limitations of a rigid secularism which sees moral and ethical issues as irrelevant or out of bounds. This can often be seen in utilitarian thinking – the idea that what is best for the individual leads always to the best solution. The authors commented that despite having some validity, “it can not be ignored that individual utility – even where legitimate – does not always favor the common good.”
Although there is no ideal financial and economic model, the world crisis makes it urgent that we make dramatic adjustments. Certainly this would mean transparent institutions and improved international relations that provide better opportunity – including a fairer distribution of wealth, and more universal access to economic development. The economic ‘note’ can be seen as a petition calling on world leaders to consider a greater respect for our Judeo-Christian heritage and other moral based traditions. Religious leaders should not be discouraged or remain silent at this critical time.
David J. Peterson is an author and a high school teacher with a degree in economics. He lives in Chicago.